Case Study on Capital Gains Tax and Fringe Benefits Tax

Questions: Case study 1: Capital Gains Tax. 2: Fringe Benefits Tax. Answers: Answer to Case Study 1:- a) Calculation of Net Capital Gain/ Loss of Individual Taxpayer:- It is assumed that Dave Solomon, is an individual, whose main source of income is the salary, paid by his employer. He is not involved any kind of trading business. The assets sold by him in the current tax year can be considered, completely, as his capital assets. Moreover, he has generated any revenue from those assets earlier. Calculation of Net Capital Gain/Loss:- The net taxable capital gain or loss, generated from the sale of assets by David Solomon in the current tax year, is presented below (Law.ato.gov.au, 2016):- Name of Taxpayer : Dave Solomon Type : Individual Calculation of Net Capital Gain/Loss for the period ending on 30th June,20. Particulars Amount Amount $ $ a) Sale of Paintings : Selling Price of the Painting 125000 Less : Purchase Price of the painting 15000 Capital Gain on Sale 110000 Less : 50% Exemption on Capital Gain 55000 Taxable Capital Gain (A) 55000 55000 b) Sale of Luxury Motor Cruiser: Selling Price of the Cruiser 60000 Less : Purchase Price of the Cruiser 110000 Net Capital Loss (B) -50000 -50000 c) Sale of Shares: Selling Price of the Shares 80000 Less : Purchase Price of the Shares 70000 Less : Brokerage on Sale of Shares 750 Less : Stamp Duty on purchase of Shares 250 Taxable Capital Gain ( C) 9000 9000 Total Taxable Capital Gain (A+B+C) 14000 Less : Capital Loss of Previous Year 10000 Net Taxable Capital Gain 4000 Important Notes:- The capital gain on sale of the residential house of David Solomon is taken into consideration for ascertaining taxable capital gain, as the house was used for residential purpose by the taxpayer. According to the Australian Taxation Rule, any capital gain, generated from the sale of residential property is exempted from taxation (Woellner et al. 2012). The forfeiture of the deposits for breaching of contract by the purchaser has occurred within continuum of event. Therefore, the forfeiture of deposit is not considered as CGT event (Chan 2014). The painting, which has been sold in the current year, was purchased on not before 20th September, 1985, but on the same day. Therefore, it should be treated as a post CGT collectable asset and is allowed to have 50% exemption on the capital gain on sale of the asset (Conesa and Domnguez 2013). The luxury motor cruise is a personal asset and it has been owned by the taxpayer for more than 2 years. But, as the selling has generated capital loss, therefore, it is not allowed for 50% exemption (Faccio and Xu 2015). The shares, sold in the current year, are also purchased in the same period. The interest on loan, taken for purchasing the shares, is not considered as deductible expenses, as the taxpayer has not earned any income from the shares. The brokerage and stamp duty are incurred for acquiring and selling the asset. So, these costs are deducted from the respective capital gain (Harding 2013). The capital loss can be adjusted against capital gains only and it can be carry forwarded in future tax periods. Therefore, the capital loss of the previous year, is adjusted against the capital gain of the current year (Jacob and Jacob 2013). b) Consequences for Net Capital Gain:- The net capital gain, earned by David Solomon in the current year, will be added with the other assessable income to ascertain the net taxable assessable income of the taxpayer. The income slab for taxation purpose will be then determined on the basis of that net taxable income. c) Consequences for Net Capital Loss:- If David Solomon would generate any net capital loss, then that would be carry forwarded into next tax periods. It would be adjusted only if the taxpayer would generate any capital gain in future. Answer to Case Study 2:- a) Consequences Calculations for Fringe Benefit Tax of Periwinkle Pty. Ltd.:- Consequences for FBT:- It is assumed that Periwinkle Pty. Ltd. is a normal company and not entitled to any benefit for small business entities. The FBT consequences of Periwinkle, aroused for the benefits provided to Emma, one of the employee of the company is discussed below:- 1) It is assumed that the employee uses the car not only for office use but for non-work related purpose in frequent and regular basis. Therefore, the car benefit should be accounted for FBT as it is allowed to use for private purposes (Stilwell 2016). During the interstate travel of the employee, the car was parked at airport, not at the employers premises and the repairing of the car was annual maintenance type, not an unscheduled repairing. Therefore, the ten days, when the car was not used, also to be included in the FBT calculation (Hodgson and Pearce 2015). The statutory formula method is used for estimating the car fringe benefit. The calculation of car fringe benefit is shown in the following table:- Calculation Of Car Fringe Benefit:- Particulars Details Total Kms. Travelled during the FBT year A 10000 No. of Days in the FBT year B 366 No. of Days of Travel C 336 Annualised Kilometers (A x B/C) 10892.857 Statutory Rate as per Annualised Km. E 20.00% Cost Base F $33,000 No. of Days available for Private Use C 336 No. of days in FBT Year B 366 Taxable Value (FxExC)/B $6,059.02 2) The interest charged on the loan, given to the employee, should be treated as FBT. The Benchmark Interest Rate for such loan is 5.95% (Ato.gov.au, 2016). The company has charged the loan at an interest rate of 4.45%. As the actual rate is lower than the Benchmark Rate, the FBT should be calculated on the actual rate of interest (Pearce and Pinto 2015). The calculation for FBT on interest on loan is shown below:- Calculation of Interest on Loan for FBT:- Particulars Details Loan to Employee A $500,000 Benchmark Interest Rate B 5.95% Actual Interest Rate C 4.45% Taxable Value Interest on Loan D = (AXC) $22,250 3) The bathtub provided to the employee at a special discounted rate, is a FBT expense. The taxable value of the bathtub is estimated at 75% of the normal selling price and the FBT is calculated accordingly in the following table (Ato.gov.au, 2016):- Calculation of Special Discount for FBT:- Particulars Amount $ Market Price of the Bathtub A 2600 Special Price for the Employee B 1300 Taxable Value of the Bathtub C=A x 75% 1950 Taxable Value of Benefit C - B 650 Calculation of FBT:- The Fringe Benefit Tax for Periwinkle Pty. Ltd. is calculated in the following table according to the above-mentioned assumptions (Ato.gov.au, 2016):- Name of Taxpayer : Periwinkle Pty. Ltd. Type : Company Calculation of Fringe Benefit Tax for the period ending on 31st March,2016 GST Inclusive GST Free Particulars Amount Amount $ $ Car Benefit 6059.02 Interest on Loan 22250 Sale at Special Rate 650 Total of GST Inclusive/Free Benefits 6059.02 22900 A B Gross-up Rate 2.1463 1.9608 C D Gross-up Value 13004.47 44902.32 E = A x C F=B X D Total Taxable Fringe Benefit 57906.79 G = E + F Fringe Benefit Tax Rate 49% J Fringe Benefit Tax Liability 28374.33 K = G x J b) Alternative Consequences:- If the employer, herself, purchased the shares, instead of her husband and earn dividend from such shares, then the part interest on loan for $50000, will be considered as an deductible expenses of the employee. Therefore, the FBT of the employer will also get reduced accordingly (Eccleston 2013). Reference List:- Ato.gov.au. (2016).How to calculate your FBT | Australian Taxation Office. Ato.gov.au. (2016).Property fringe benefits | Australian Taxation Office. Chan, C., 2014. 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